How much would you like to have as your savings goal by the end of 2017? Maybe $10K, $5K or simply $1K? The amount you save a year is important but the percentage of your income that you save is the valuable figure.
Most people answer a question regarding a savings goal with “Well, I make X a month and spend Y a month so I could probably save [insert not too hot of a number] a year.” But put those thoughts aside and think, ideally, how much would you want to have saved this year?
Many people think saving is extremely challenging. They believe that you need expertise in personal finance in order to save any valuable amount. However it’s only hard when you put savings last. You do not think about saving any amount of money until after your last paycheck and the tenth time you have gone out to eat.Determining a savings goal isn’t challenging, it just often comes last in a person’s sequence of thoughts.
An Old Example
I have been working since I was 15. Since the first day I was working I looked at savings first and then think about how I could spend differently. I had a dual source of income at my job: tips and an hourly rate. I chose to save 80% of my hourly pay, I used the other 20% for fixed costs. (what few fixed costs a 15 year old could have) Gas money for my ride to work or money to buy lunch a few times a week to name a few. My tips were solely reserved for spending money. If there was nothing to buy then the excess spending money was converted into savings. The most valuable aspect of the system was the savings rate stayed consistent. The spending was variable and could be adapted in an instant.
A Modern Example
Almost 10 years later, I apply a similar strategy. I was fortunate enough to land a job at a top company in sales that allots me a base income and commission. The same basic idea of spending and saving applies to this day.
The number one thing when I sit down to organize my finances for the year, above all else is my savings goal. Before my income and fixed expenses are analyzed, my savings goal is determined first. Savings are first for me, before everything else because in the world we live in today, it is easy to create a fixed expense and justify it. Even when it really might be a luxury that you just happen to pay for every month.
Even if you don’t have any income beyond a base salary (which you can definitely learn how to through this blog) you can still apply the above logic to a savings goal. First, think of what you would like to have saved at the end of this year, even if it is a stretch. Then, work from there to see how much you earn in a month and how your expenses for a month.
Remember savings isn’t just money sitting in a bank, it is your money. It grants you freedom to relax about your future, a back-up in case of emergency, money for investing, and allows you to be ready for fun adventures and memories to come. Just think about having enough money for a game of mini-golf or possibly enough for a weekend getaway at your disposal.
Savings Goal Example
To determine a savings goal, the following activity is useful. The below example is one I had done with my sister and her roommates who live in New York City. They determined a savings goal that fit a budget they wanted to keep. The numbers in blue are mine, the red is my sister’s roommate.
- Write down your savings goal for the year. (think realistically)
- Now write down how much do you make after taxes (net income). Be honest and round down.
- Subtract your net income (2) by your savings goal (1).
- List necessary fixed expenses per month (not all fixed expenses are necessary, some are a choice. i.e. gym, netflix, spotify) Think rent, insurance, and things you couldn’t get rid of tomorrow.
$1,200 x 12 = $14,400 $2, 331 x 12 = $27, 972
- Now list all other monthly fixed expenses (gym, date night/ lunch gathers that you have regularly, spotify, netflix)
$272.25 x 12 = $3,267 $505 x 12 = $6,060
- Total fixed necessary expenses (4) and all other monthly expenses (5).
Is this number greater or less than the number you got at step 3? Hopefully less so that you can reach that goal and have money to spend each month, what I call fun money. If you don’t have enough, are there any fixed expense especially those in the other list (5) that you could trim?
My fixed monthly expenses for the year are less than (3) so I can make my savings goal!!
My friend’s monthly expenses were more than what was left after her savings goal (3)
Lastly, take how much money you have from (6) and subtract from (3) how much was left after your savings. Then, divide by 12 to get your monthly spending money.
$21,699 – $17,667 = $4,032 / 12 = $336
Therefore, I can spend on eating out and activities: $336 a month
$31,000 – $34,002 = -$3,002
Therefore, my friend is short of her saving’s goal by about $3,000. This leaves them without any monthly spending money. My friend looked at her expenses and realized she spends a good portion of money on weekly lunches and nail/hair appointments in her (5) other fixed expenses. She is cutting back her nail appointments from twice to once a month and one less weekly lunch. She will use that money for fun spending and take the $7,000 left after her fixed income to save for the year.
Savings Goal Recap
For some people, a smaller amount of monthly spending money is not always bad because they have a lot of fixed expenses that are more of a luxury so they do not need a lot of extra spending money. Some people may be disappointed with the money they have left after expenses. It is important to remember that we need to rethink how we save. Savings is not a distant place that is not achievable. A savings goal is tangible. It should be growing as you do in order to provide for better uses in the future.
Looking at savings before anything else makes one have saving goals to be a priority. Start with what you want as your outcome then think about how to achieve your goal. People have said this exercise makes them realize what their savings goal truly is possible. It helps to visualize the amount you can save but also have enough to spend on yourself to remain happy. Reaching your savings goal is easily attainable. Remember to keep your savings consistent and let your spending be variable.
Let me know what you thought about a savings goal and the activity that followed in the comments below!